Retire With One Investment, Part II

By Matthew Milner, on Wednesday, January 28, 2015

All It Takes Is One.

That was the gist of my article last week

The idea that a single investment could create enough wealth to last a lifetime.

The article hit a nerve:

We received a flood of emails asking for more information –

From “How do I get started?” to “Where do I find these investments?”

But the question we received the most was this one:

“How is this even possible?”

Homeruns

In last week’s article, I told you about a few real-world homerun investments…

For example, Paul Graham’s investments in Heroku and Twitch.

Those investments returned 491 and 573 times his money, respectively.

Or Howard Lindzon’s investment in Uber.

That one investment returned 400 times his money.

For every $5,000 he invested, he got back $2 million a few years later.

How do they do it?

Start-Up Math in a Nutshell

Professionals investors like Howard and Paul don’t just invest in a start-up or two and expect them to be winners…

Over the course of several years, they build a portfolio of start-ups.

Why?

Because unlike the stock market, where you might be in 10 or so positions at any one time, early-stage investing requires far more diversification.

At a minimum, it requires investing in 25 to 50 companies…

And investing in 100 of them would be even better.

It takes time to build up a portfolio of that size…

But once it gets built, the professionals expect the math to end up looking like this:

  • In a portfolio of 100 companies, about 30% will fail, returning zero.
  • Another 40% might provide a return of capital or a small profit.
  • And 30% will be “winners” – investments that can return about 10 times their money, and sometimes far more.

If you calculate the math based on 100 investments of equal size, you’ll see that the returns from the overall portfolio add up to three times the initial investment.

Since this happens over the course of several years, that equates to an annualized return of 20% to 30%.

In fact, in a study conducted by The Kauffman Foundation, a large non-profit that studies entrepreneurship, the historical average return for angel investors has been 27% per year.

But What About those Homeruns?

Compared to Howard’s 40,000% returns on Uber, maybe 27% doesn’t sound so impressive…

But here’s the thing:

27% is three to four times higher than the historical returns of the stock market.

Furthermore, as long as you build a portfolio of start-ups…

And as long as you invest in the right kinds of companies…

You’re dramatically increasing your odds of investing in an Uber, Heroku or Twitch – investments that could add millions of dollars to your net worth.

Investments that will let you retire.

Can’t I Get Just the Homeruns, Please?

It’s nice to think we might know in advance which start-ups will be homeruns…

That we could just “bet it all on black” and be done with it.

But it doesn’t work like that – and the professionals know it.

Fred Wilson, one of the most successful venture investors in the industry, likes to make a baseball analogy:

The best hitters in baseball, he says, tend to hit balls out of the park when all they’re trying to do is “make good contact.”

If a hitter tried to hit every ball out of the park, they’d strike out too much.

According to Fred, it’s the same thing in the venture business:

Build a portfolio with the right types of companies, get your “base hits” – and every once in awhile, you’ll be pleasantly surprised by that retirement-worthy homerun.

The Secret to Early-Stage Investing

So, yes, it really is possible.

Now you know the “secret” to early-stage investing success.

This is how Paul, Howard and Fred have invested in multiple retirement-worthy investments over the years…

And this is how you could do it, too.

Ready To Get Started?

Here are a few options:

1. Check Out Our Free Resources

To increase your chances of success, learn as much as you can about early-stage investing.

You can read our archives of essays and white papers here and here.

And in Friday’s newsletter, we link to other peoples’ useful information.

2. Check Out New Start-up Investments

Crowdability aggregates start-up investment opportunities from the highest-quality deal platforms on the Internet.

Every Monday at 11am EST, we email new deals to you…

And in the meantime, you can see all the deals here >>

3. Take It To the Next Level

Or if you’re really ready to start making homerun investments…

And you want to learn everything you can about how to identify the most promising deals, how to properly evaluate them, and how to get involved...

Consider signing up for our premium education program, The Early-Stage Playbook.

It’s an online education program you can take at home, at your own pace.

We’re temporarily opening enrollment, and we’re offering a discount to Crowdability readers.

You can learn more about the program here >> 

Best Regards,
Matthew Milner

Founder
Crowdability.com

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Tags: Uber Kauffman Foundation Fred Wilson Kauffman Study Howard Lindzon Paul Graham Early-stage Playbook

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